The Federal Trade Commission proposed a new rule that would ban employers from imposing non-competes on their workers, a widespread practice that when misused could potentially hamper innovation, and frequently blocks entrepreneurs from starting new businesses. They recently extended the public comment period to April 19, 2023.
An estimated 18% of workers, or 30 million Americans, many of them senior level executives, are currently working under some form of a non-compete. Silver Tiger Consulting has been carefully monitoring this proposed rule, especially as it will affect Massachusetts employers, who are operating under a 2018 state law governing the use of non-competes. The proposed rule banning non-competes, if passed, could nullify these existing agreements.
The type of Non-Competition Agreement (“non-compete”) agreement being addressed are those that prohibit an employee from engaging in specified activities after their employment has ended. The most common examples of prohibited activities these agreements cover require the employee not to solicit employees of the employer, not to solicit contacts/clients of employer, and not to interfere in the previous agreements from the employer.
What the FTC is trying to accomplish with this proposal is to ensure fair competition by not restricting the entrepreneurship opportunities, employment opportunities, and employer mobility of these covered employees. Their reasoning and legal standing for the proposal is under section five of the Federal Trade Commission Act. This gave power to the FTC to prohibit employees and employers from “using unfair methods of competition in it affecting commerce and unfair or deceptive act or practices in or affecting commerce.” The timeline for this proposed ban to go into effect is not certain. For the proposed rule banning non-competes to go into effect, it must be passed by congress.
Currently, in the state of Massachusetts there are eight basic items executive teams need to be aware of for an existing non-competition agreement to be valid and enforceable, and the MA law covers both employees and many independent contractor situations. Depending on when employees are asked to sign (at the start of employment or after already employed), there are also additional procedural requirements. A quick summary is below. For more detailed information about the existing MA law regarding noncompete agreements, please consult your legal counsel or visit:
1. The Non-Compete Agreement must be in writing and signed by the employer and employee.
2. If the agreement is entered in connection with an employee leaving, the employee has a right to legal counsel review and must be within 10 business days before the final notice was given.
3. The agreement must only protect the legitimate business interests of the employer.
4. The agreement cannot be enforced for more than 12 months after the day of unemployment, unless certain criteria is not met by the employee which can extend it to 24 months maximum
5. The agreement needs to be within certain geographic reach of the employer.
6. The agreement must be within a reasonable scope
7. The agreement must be supported by the garden leave clause or mutually agreed upon consideration, which is a clause in which the employer must pay the employee during the effective period. The garden leave pay must be at least 50% of the employee’s highest base salary over the prior two (2) years, pro-rated over the restricted period. There isn’t an exception to the mandatory garden leave requirement where an employee resigns or is terminated for cause. If an employee resigns his or her employment to go work for a direct competitor, the employer still needs to pay the agreed-upon consideration to hold that employee to his or her post-employment non-compete obligation.
8. The agreement must align with other applicable laws.
Also, Executive teams should be aware that the law voids non-compete covenants where the employer terminates the employee without cause or includes them in a layoff.
With the proposed ban on non-compete agreements, executive teams should revisit company strategies around non-compete agreements and existing, signed non-compete agreements in MA. Most Massachusetts employers primarily use non-compete agreements to safeguard proprietary information, protect a company's book of business, and prevent a top-level executive that is leaving from taking a good many of their former direct reports with them if they start their own business or go to a competitor. There are many other HR policies and strategies that can be used to do much of the same.
What Employers Should Do Now:
1. Safeguard Information: By re-evaluating and restricting the number of employees that have access to sensitive data like client contracts, client fees, client lists, employee salary information, and employee personal contact information, a company can go a long way in eliminating or preventing exposure and therefore loss and misuse of this information. Review your IT and HR access policies and procedures and know who has access to what and when. Many systems allow you to fine tune which employees have access to what- not everyone using an HRIS, Project Management, or Contract Management system usually needs “ADMIN” or “Super User” access to successfully accomplish tasks. Many also only need elevated access during certain times of the year or when certain circumstances occur. Carefully evaluate what access level is truly needed. Many times, we’ve seen how simply better organizing information in these systems allows more useful and secure segregation of user access.
2. Update Template Documents in Onboarding Packages: Non-Disclosure Agreements and or Non-Solicitation Agreements can and should be separate agreements outside of any non-compete agreements that may be in place: The proposed FTC rule does not ban non-disclosure and non-solicitation provisions. However, it will does apply a functionality test that could invalidate such provisions if they are found to be de facto non-compete provisions. Getting these elements in writing and then signed by employees also serves the purpose of clearly documenting expectations and best practices around what is proprietary or confidential information and what is expected of employees. For many employees that are not C-level or in key business development roles, these types of agreements may suffice and should be strongly considered as an alternative to a non-compete given the proposed ban. Executive Teams should work with legal council to draft these if they do not already exist.
3. Update and document formal HR policies around how sensitive and confidential information should be handled: Information such as client payment information, employee personal data, internal client procedures, etc., should be handled, treated, and safeguarded according to internal written guidelines. What may seem “common sense” to some people may not be obvious to others. Always err on the side of over-documenting these procedures and policies. Collect employee signatures on these updated policies and repeat the message via internal training and as agenda items in existing meetings and in executive- level emails to staff.
Make sure your staff knows it is a company priority.
Contact Silver Tiger Consulting to aid your company in the navigation of possible changes to company policies around non competition agreements and safeguarding of information.